On Appeal from the United States District Court for the District of New Jersey. D.C. Civil Action No. 92-4278
Before: Sloviter, Chief Judge, Stapleton, Circuit Judge, and Restani, Court of International Trade Judge*fn*
This is an interlocutory appeal from a judgment of the United States District Court for the District of New Jersey, denying defendant-appellants' motion for a referral to the bankruptcy court, dismissal, abstention, or stay. Billing v. Ravin, Greenberg & Zackin, P.A., 150 Bankr. 563, 570 (D.N.J. 1993). Defendant-appellants Ravin, Greenberg & Zackin, et al., ("Ravin, Greenberg") acted as bankruptcy counsel on behalf of plaintiff-appellees Anders S. Billing and Diann E. Billing ("the debtors"). After Ravin, Greenberg filed an application for fees with the bankruptcy court, the debtors objected on the ground that the attorneys had engaged in legal malpractice.
The debtors filed a separate malpractice action in district court, invoking their right to a jury trial under the Seventh Amendment to the U.S. Constitution. The district court agreed that the debtors were entitled to trial by jury and held that bankruptcy courts did not have the authority to conduct jury trials. Id. at 567-68, 570. Therefore, it denied Ravin, Greenberg's motion for referral of the malpractice action to the bankruptcy court, dismissal, abstention or stay. Id. at 570. Ravin, Greenberg now appeals the district court's denial of its motion.
In June 1989, the debtors filed several voluntary petitions under Chapter 11 of the bankruptcy code. Billing, 150 Bankr. at 564. The debtors retained Ravin, Greenberg as bankruptcy counsel pursuant to an order of the bankruptcy court. Id. The debtors' reorganization plan, which the bankruptcy court approved on August 10, 1992, provided for the payment of attorney's fees only in such amounts as are allowed by the bankruptcy court in accordance with statutory standards. Id. ; Joint Modified Plan of Reorganization, art. 2, Joint Appendix at 22.
After obtaining approval of the reorganization plan, Ravin, Greenberg presented to the bankruptcy court an application for attorney's fees in the amount of $199,043.50 plus $19,978.20 in expenses. The debtors subsequently sued the attorneys in the United States District Court for the District of New Jersey on the grounds of legal malpractice, requesting trial by jury. The complaint was filed on October 16, 1992 and entered on October 20. On or about October 16, the debtors submitted their objection to fees to the bankruptcy court, alleging that Ravin, Greenberg spent excessive amounts of time in meetings, reviewing the pleadings, and reviewing the file. Billing, 150 Bankr. at 564. The debtors' primary objection, however, rested on their allegations of legal malpractice. Id. They strongly protested the award of attorney's fees while their malpractice complaint against Ravin, Greenberg was pending in district court.
On November 23, 1992, Ravin, Greenberg gave notice of its motion to dismiss the debtors' malpractice action, or, in the alternative, to stay the proceedings until the bankruptcy court had resolved the fee dispute. The district court issued an opinion denying the motions on January 27, 1993. The court held that: 1) the proceeding is a core proceeding under the meaning of the bankruptcy code; 2) the debtors' claims are legal and thus give rise to a right to jury trial; and 3) bankruptcy courts cannot conduct jury trials, and therefore the dispute must be resolved in district court. Id. at 567-570. The district court denied Ravin, Greenberg's motion for reconsideration in light of the recently decided case of Travellers Int'l AG. v. Robinson, 982 F.2d 96 (3d Cir. 1992), cert. denied, 123 L. Ed. 2d 651, 113 S. Ct. 1946 (1993). Billing v. Ravin, Greenberg & Zackin, P.A., Civ. Action No. 92-4278 (D.N.J. Feb. 23, 1993) (denial of motion for reconsideration).
On March 25, 1993, the district Judge granted Ravin, Greenberg's motion to certify the following questions for interlocutory appeal: 1) whether the debtors' action for malpractice constitutes a core proceeding; 2) whether a bankruptcy court is empowered to conduct a jury trial in a core proceeding; and 3) whether the debtors "waived" their right to a trial by jury by submitting to the equitable jurisdiction of the bankruptcy court. Billing v. Ravin, Greenberg & Zackin, P.A., 150 Bankr. 563,, (D.N.J. Mar. 25, 1993) (order certifying questions for interlocutory appeal and denying stay pending appeal).
The district court took subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334 (1988). Billing v. Ravin, Greenberg & Zackin, P.A., 150 Bankr. 563, 564 (D.N.J. 1993). Section 1334 grants jurisdiction to the district courts over cases under title 11 of the United States Code, arising under title 11, or arising in or related to cases under title 11. 28 U.S.C. § 1334(a), (b). The district court determined that the debtors' malpractice claims arose under title 11 because of the claims' connection with the debtors' bankruptcy petitions. See Billing, 150 Bankr. at 564. We find that jurisdiction in the district court was proper under § 1334.
We have appellate jurisdiction pursuant to 28 U.S.C. § 1292(b) (1988). An appellate court may permit an interlocutory appeal if the district court certifies that its order involves a controlling question of law as to which there exists substantial controversy and that an immediate appeal will advance the termination of the litigation. Id. On March 25, 1993, the district court issued an order certifying this case for interlocutory appeal. This court granted permission to appeal on May 12, 1993. Thus, we have appellate jurisdiction.
Because this case centers on issues of law rather than fact, the standard of review is plenary. In re Data Access Sys. Sec. Litig., 843 F.2d 1537, 1539 (3d Cir.), cert. denied, 488 U.S. 849 (1988). Although the scope of review on an interlocutory appeal is generally constrained to the questions certified for review by the district court, we may consider any grounds justifying reversal. Id.
As a preliminary matter, we note that the parties do not contest the district court's holding that the debtors' malpractice claim constitutes a core proceeding under the meaning of the bankruptcy code.*fn1 Therefore, the first question certified for interlocutory appeal will not be addressed by this court. The second question, whether bankruptcy courts have the power to conduct jury trials, is not reached, as we find in answer to the third question that the debtors have no right to a jury trial in this instance.
The Seventh Amendment provides, "in Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved." U.S. Const. amend. VII. The Supreme Court interprets "suits at common law" to mean cases involving legal rights; no jury right attaches to equitable claims. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41, 106 L. Ed. 2d 26, 109 S. Ct. 2782 (1989). In determining whether a claim is equitable or legal,
first, we compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature. The second stage of this analysis is more important than the first. If, on balance, these two factors indicate that a party is entitled to a jury trial under the Seventh Amendment, we must decide whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as factfinder.
Id. at 42 (citations omitted). An action for money damages based on a breach of contract is traditionally a legal claim. See Dairy Queen, Inc. v. Wood, 369 U.S. 469, 477, 8 L. Ed. 2d 44, 82 S. Ct. 894 (1962). Actions sounding in tort "for damages to a person or property" are also generally considered to be actions at law. See Ross v. Bernhard, 396 U.S. 531, 533, 24 L. Ed. 2d 729, 90 S. Ct. 733 (1970).
One bankruptcy court decision has directly addressed the issue of whether a claim for legal malpractice of bankruptcy counsel satisfies the first two prongs of the Granfinanciera test. The court stated:
generally, negligence which gives rise to legal malpractice is based upon the attorney's breach of his duty of care. The essence of such an action is in tort.
In re SPI Communications & Mktg., Inc., 112 Bankr. 507, 512 (Bankr. N.D.N.Y. 1990). The bankruptcy court determined that the malpractice claim sounded in law rather than equity and that money damages for malpractice constituted a legal remedy. See id. Without discussing the third prong of Granfinanciera or the possible limitations of Granfinanciera implicit in other Supreme Court precedent, the bankruptcy court concluded that the attorney had a right to jury trial on the malpractice claim against him. Id.
The first two prongs of the Granfinanciera test do not provide a complete answer, however. Inquiry into the third prong of the test may reveal exceptions to the rule. In the third prong, the Supreme Court discussed whether Congress had permissibly assigned to non-Article III tribunals the adjudication of disputes arising in or related to bankruptcy proceedings. Granfinanciera, 492 U.S. at 42. The Court determined that Congress may assign disputes involving "public rights" to a tribunal that does not use a jury as a factfinder without violating the Seventh Amendment. Id. at 51.
No right to trial by jury exists in cases "where the Government is involved in its sovereign capacity under an otherwise valid statute creating enforceable public rights. Wholly private tort, contract, and property cases, as well as a vast range of other cases, are not at all implicated." Id. (quoting Atlas Roofing Co. v. Occupational Safety & Health Review Comm'n, 430 U.S. 442, 458, 51 L. Ed. 2d 464, 97 S. Ct. 1261 (1977)). The category of public rights may include seemingly private rights, if they are closely integrated into a public regulatory scheme assigned to an administrative agency. Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 593-94, 87 L. Ed. 2d 409, 105 S. Ct. 3325 (1985); Beard v. Braunstein, 914 F.2d 434, 441 (3d Cir. 1990).
Whereas the argument is made that the restructuring of debtor-creditor relations in bankruptcy may constitute a public right,*fn2 the right of a debtor to recover contract damages to augment the estate is private. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71-72, 73 L. Ed. 2d 598, 102 S. Ct. 2858 (1982). The right of a trustee of the debtor's estate to reclaim a fraudulent conveyance made in anticipation of bankruptcy also implicates a private rather than public cause of action. Granfinanciera, 492 U.S. at 55.*fn3 A debtor's action to recover damages for legal malpractice, arising from an attorney's tortious negligence, is likewise a private rather than a public right, and thus ordinarily would implicate a right to jury trial.
In support of its argument to the contrary, Ravin, Greenberg relies in particular on In re Brenner, 119 Bankr. 495 (Bankr. E.D. Pa. 1990). Brenner involved claims by a successor bankruptcy trustee against the predecessor trustee and his counsel for breach of fiduciary duty. Id. at 495. The bankruptcy court found that actions between trustees were generally founded in equity, and that even if monetary relief was sought, the remedy would take the equitable form of an accounting. Id. at 497. Therefore, it determined that the first two prongs of the Granfinanciera test were not satisfied. Id. at 496-97. The court stated further that the action involved a trustee engaged in "the 'public' business of the administration of the Debtors' bankruptcy case." Id. at 497. The court distinguished SPI on the ground that SPI "targeted alleged wrongful acts of the respective debtors' counsel." Id.
We need not go so far as the bankruptcy court appeared to do in Brenner. That is, we do not find that every matter involving the administration of the debtor's bankruptcy case evokes public rights. Rather, legal claims that may involve private rights nonetheless may, in certain bankruptcy contexts, be decided in equity.
The third prong of the Granfinanciera test suggests a limitation on the Seventh Amendment right to trial by jury in addition to the public rights doctrine. This restriction, less well articulated, has emerged in connection with creditors' demands for a jury trial in actions brought by the trustee in bankruptcy. Thus, a Discussion of the creditor's right to a jury trial provides a necessary backdrop to our analysis of the debtor's right to a jury trial.
In addressing a creditor's Seventh Amendment rights under the modern bankruptcy code, the Granfinanciera Court examined Katchen v. Landy, 382 U.S. 323, 15 L. Ed. 2d 391, 86 S. Ct. 467 (1966), which considered the creditor's right to a jury trial under the Bankruptcy Act of 1898. Granfinanciera, 492 U.S. at 57. The 1898 Act forbade the allowance of a creditor's claim if the creditor had received a preferential transfer from the debtor prior to the date of bankruptcy. Katchen, 382 U.S. at 330. The creditor in Katchen, after filing a proof of claim, invoked his Seventh Amendment right to a jury trial when the trustee objected to the claim on the ground of preference. See id. at 327-28.
The Court first noted Congress' intent to render the administration of the bankruptcy estate inexpensive, efficient and prompt. Id. at 328. Under the 1898 Act, the resolution of disputed claims was meant to occur in the context of summary proceedings conducted by the bankruptcy court rather than through the slower and more expensive proceedings at law. Id. at 329.*fn4 As part of its power to allow or disallow claims, the bankruptcy court could summarily adjudicate the trustee's objections to a creditor's claim. Id. at 330.*fn5 The Court in Katchen therefore concluded that
although petitioner might be entitled to a jury trial on the issue of preference if he presented no claim in the bankruptcy proceeding and awaited a federal plenary action by the trustee, Schoenthal v. Irving Trust Co., 287 U.S. 92, 77 L. Ed. 185, 53 S. Ct. 50 [(1932)], when the same issue arises as part of the process of allowance and disallowance of claims, it is triable in equity.
Katchen, 382 U.S. at 336. There is no right to trial by jury where the claims allowance process is implicated, because the Bankruptcy Act "converts the creditor's legal claim into an equitable claim to a pro rata share of the res." Id.
In Schoenthal v. Irving Trust Co., the trustee of the bankrupt's estate brought a suit in equity against two individuals for the recovery of an allegedly preferential transfer. 287 U.S. at 93. The Court stated, "suits to recover preferences constitute no part of the proceedings in bankruptcy but concern controversies arising out of it." Id. at 94-95. The Court then determined that the suit should be heard at law because the defendants, who apparently had neither counterclaimed nor ...